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Jan 10, 2018, 09:00am

Strong International Standards On Auditing: Crucial Support For Global Financial Market Stability

A single set of international auditing standards that apply to audits for all organizations -- not just large listed companies -- is an essential component of the world’s financial architecture. These high-quality standards help create a common audit language that reaches across borders to strengthen all organizations, facilitate trade and support economic growth. The unique model for developing these standards is currently under review, with the objective to ensure that the international standard-setting model going forward is fit for purpose in our rapidly changing world.

The Monitoring Group (MG), a group of international bodies charged with overseeing the international audit and ethics standard-setting process, recently released a consultation paper outlining their proposals for a standard-setting process that fundamentally changes the current model.

The Current Model: Effectively Supporting The Public Interest

The foundation of today’s international standard-setting model is strong collaboration between the private and public sectors and robust checks and balances that ensure no single stakeholder can exercise undue influence over the process. The current model recognizes the public interest is best protected when all stakeholders cooperate to exercise their public interest obligations. Indeed, this collaborative approach is now recognized as a key feature of good regulatory practice in many jurisdictions around the world.

Focused on promoting audit quality and best use of the auditors’ skills and professional judgment, the model has produced standards that can be applied to a range of reporting entities: listed and private, large and small. Confidence in the model is high. A significant number of jurisdictions have either directly adopted or use the International Auditing and Assurance Standards Board (IAASB) and International Ethics Standards Board for Accountants (IESBA) standards as the basis for their national standards, with many incorporating them into legislation.

The global economy needs certainty and confidence.

Given the success of the current model, any changes need to be carefully analyzed and will benefit from the input of all interested stakeholders, including investors, financial statement preparers and Audit Committee members. IFAC, as the global body for the accountancy profession, agrees with a number of important principles included in the consultation, including the need for the audit and ethics boards to be more explicitly multi-stakeholder in their composition. Similarly, the Public Interest Oversight Board, which oversees due process, should be explicitly multi-stakeholder in its composition and would benefit from greater clarity around its mandate. Additionally, IFAC agrees that the audit board, in particular, needs to move swiftly to address the rapid advancement in the use of technology in today’s audits.

IFAC is concerned, however, that some of the proposals are not well thought-out, and in many cases, the Monitoring Group failed to provide an appropriate evidence base to support the need for its more dramatic proposals.

One of the stated aims of the Monitoring Group proposal is to make audit standards more prescriptive with less room to exercise auditor judgment. This would undermine years of steadily improving audit quality underpinned by the premise that auditor judgment is critical to high-quality audits. Compliance-based, “tick the box” audits are also more likely to lead to increased costs for companies and audit firms, and hinder growth.

Another crucial concern is that the nature of the Monitoring Group’s proposals increases regulatory fragmentation risk. The proposals simply assume that standards developed under the proposed model will be readily accepted worldwide. Given it has taken over two decades to achieve current global adoption levels, any return to national audit rule-setting would have serious implications for businesses operating internationally. Inconsistent standards from one jurisdiction to the next can decrease transparency, reduce efficiency and increase transaction costs.

It is clear that the Monitoring Group is seeking to dilute the profession’s input into the standard-setting process. In doing so, it increases the risk of impractical standards that are difficult to implement. While it’s vital that a wide variety of stakeholders representing many different jurisdictions are able to provide meaningful input into standards, the experience and knowledge of current audit professionals are absolutely essential.

Finally, the timing of these changes presents its own challenges. New technologies are changing audit and ethics for professional accountants at a rapid pace. As the profession works to integrate these advances and the IAASB continues its work to adapt standards to address new technologies available to the audit market, now is not the right time for disruptive change to a standard setting model that has been working well, and in the public interest, for many years.

An International Standard-Setting Model That Works In The Public Interest

IFAC believes the current model is working well, but that it can be enhanced with some key measures that will further support the public interest. We have proposeda range of alternatives that would, among other things, work to increase perceptions of standard settings’ independence from the accountancy profession and propose measures to make standard setting more efficient and faster. Importantly, it is possible to address stakeholder concerns while maintaining a stable international standard-setting environment that will enable both boards to carry on with their critical work.

The accountancy profession remains committed to working effectively, in the public interest, with regulators and governments to create and evolve a framework and governance structure for independent international standards’ development and adoption. Risking decades of painstaking consensus-building to leap into the unknown is not in the public interest and would be unnecessarily disruptive to standard setters and capital markets.